The Australian dollar (AUD) has depreciated sharply against the US dollar (by 12%) and the trade-weighted basket (by 6%) since the start of the year. This has provided support for our exports (particularly services). And strong competition amongst retailers, which is squeezing margins, has limited the pass through of higher import prices to households.
Our models suggest that the AUD is currently below its equilibrium value against the USD. This is largely a result of recent strength in the US economy, which has generated positive US sentiment in financial markets, and the relative policy rate positions of the Federal Reserve and the RBA. Against the broader basket of currencies, the AUD is much closer to its equilibrium value. Looking ahead we are not forecasting an immediate recovery of the AUD against the USD – we expect this to materialise only when financial markets shift their position on the outlook for the US relative to other countries.
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